Understanding the Main Rules for Individual Capital Gains Treatment

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| Courtney Price

In a recent webinar, All You Need to Know About Share Buy-Backs, Peter Rayney explained that company purchases of own share (POS) deals have become increasingly popular as an exit route for shareholders.

To give insight into this, Peter took us through the legal and tax rules and structuring issues involved on POS transactions. One of these sections covered the main rules for individual capital gains treatment. The rules are set out below:

1. Unquoted Trading Company/Group

The first condition for individual capital gains treatment is that the company buying back the shares must be an unquoted trading company or group. The definition of 'trading' here differs from the one used for Business Asset Disposal Relief (BADR), focusing more on the 'more than half' rule rather than the 80-20 test.

2. Shares Owned for Five Years

The shares in question must have been owned for at least five years. This period can include ownership by a spouse if shares were transferred between them. Additionally, if there's been a share-for-share exchange during a reconstruction, this can also count towards the five-year ownership requirement.

3. Benefit of Trade

One of the most crucial conditions is that the buyback must benefit the company's trade. This means that even if the buyback is due to retirement, it must be clearly articulated how this action will benefit the company's trade. An advanced tax clearance under section 1033 is vital to ensure this condition is met.

4. Dispose of All Shares or Substantial 'Reduction'

To satisfy the benefit of trade test, you must sell all your shares. However, HMRC allows you to keep a 5% sentimental stake. If you're looking at a substantial reduction, the reduction of share capital must be at least 25% at each stage.

5. UK Resident Seller

The seller must be a UK resident. If the seller is not a UK resident, the tax treatment of the buyback will need to be determined according to the tax laws of the seller's home jurisdiction.

6. Must NOT be Connected Immediately After Purchase

Finally, you must not be connected to the company immediately after the purchase. This connection test includes voting rights and loan capital. You cannot possess more than 30% of the company's shares, voting rights, or loan capital after the purchase. This rule is crucial to ensure that the capital gains treatment is applied correctly.

In conclusion, understanding these main rules for individual capital gains treatment is essential for anyone involved in a share buyback. It's always advisable to seek professional advice to ensure compliance with these complex regulations.

To watch the full session, click here. In the session, Peter Rayney covers the above as well as the following topics:

  • The legal POS landscape
  • Accounting for a POS
  • The default ‘distribution’ rule
  • How to bring the POS within the CGT regime
  • Corporate sellers
  • Structuring multiple completion POS’s

The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article.

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About the Author

Courtney Price is a content creator for CPDStore UK. Courtney joined us during the COVID-19 pandemic and has been involved in the ever-evolving world of accounting ever since. Her passion for reading and writing, coupled with her degree in copywriting from Vega School has allowed her to channel her creativity and expertise into crafting engaging and informative content.

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